Merchant Cash Advance Investing: A Brief Guide

Investing in a merchant cash advance puts you at the forefront of an increasingly popular and potentially lucrative method of business financing. Merchant cash advance investing offers high returns while supporting the growth of small businesses. All by providing businesses with a quick infusion of capital in return for a portion of future revenue.

Understanding Merchant Cash Advance Investing

Merchant cash advance (MCA) investing is a relatively new way for investors to fund small businesses while earning quick and high returns and diversifying their portfolios.  

How Does Merchant Cash Advance Investing Work?

The overarching theme of merchant cash advance investing is that an investor gives a company a lump sum in exchange for a percentage of a company’s future credit card sales until the borrowing business repays the cash advance in full.

Here is a brief explanation of how the process works.  

• Due Diligence: An MCA investor will always do their due diligence and look at a company’s sales. Generally, they will look at the average value of credit card sales.
• The Advance: The MCA investor will offer the company an advance amount or an upfront lump sum of cash with a factor rate, determining the total sum the investor will need to pay back.
• Holdback Rate: The other critical ingredient of the MCA investment is the holdback rate. The holdback rate is the percentage of daily credit sales a borrower reserves to repay the investor. This rate is typically 10%-20%.
• Repayment Period: Typically, repayment periods last 3-12 months. During this period, a business will repay an investor daily, weekly, or monthly according to its holdback rate until it fully repays its advance.  

Is Investing in Merchant Cash Advances Legal?

Yes, MCA investing is legal. However, there are a few things that merchant cash advance investors should consider:

• Not Federally Regulated: Merchant cash advances are not federally regulated. That’s because MCAs are structured as commercial transactions, not loans.
• Not Governed By Banking Laws: Banking laws do not govern merchant cash advances; they are regulated state-by-state according to the Uniform Commercial Code.
• Must Comply With Some FTC Regulations: Merchant cash advance investors must comply with the Federal Trade Commission's (FTC) truth in advertising regulations.

How Big is the Merchant Cash Advance Industry?

According to Sobanco, the size of the merchant cash advance industry more than doubled from $8 billion to $19 billion between 2016-2021. Debanked’s research also estimates the global MCA market is worth over $20 billion.

While figures vary around the size of the merchant cash advance industry in 2023, it’s clearly an industry continuing to grow at a breakneck pace.

• MarketWatch figures reveal that the global merchant cash advance market was worth roughly $2.8 billion in 2022. By 2028, it could expand at a 21.79% CAGR to approximately $9.12 billion.
• Digital Journal assesses that the global merchant cash advance was worth $620.31 million in 2021. By 2027, it could expand at a 19.33% CAGR to $17.91 billion.
• Adroit Market Research is even more bullish and sees the global merchant cash advance industry becoming a $26.3 billion industry by 2029. 

Why Are Merchant Cash Advances a Good Investment Option?

Many investors find investing in merchant cash advances appealing for several primary reasons.

• High Returns: MCAs are considered higher-risk investments, so they typically offer higher returns to compensate for this risk. According to David Roitblat, president of MCA-specializing New York accounting firm Better Accounting Solutions, MCA returns should fall between 20%-80%.  
• Quick Returns:  MCAs offer quick returns with investment time frames that rarely last longer than 12 months.  
• Diversification: Because MCAs are not correlated to traditional investments and have a different type of structure, they are an excellent portfolio diversification tool.

Who Can Invest in Merchant Cash Advances?

Merchant cash advances are high-risk, high-reward investments requiring significant capital, industry knowledge, and a high-risk tolerance.

Although crowdfunding platforms have made merchant cash advance investing more accessible, investing in merchant cash advance is still limited to accredited and institutional investors.

• Accredited Investors: The SEC defines accredited investors as eligible to invest in complex or sophisticated securities. Accredited investors must meet certain criteria, like a net worth of at least $1 million or an annual income of at least $200,000.
• Institutional investors: An institutional investor is an organization or entity that invests money on behalf of groups or entities, such as pension funds, endowments, hedge funds, or mutual funds.

What Are the Best Merchant Cash Advance Companies to Invest In?

There’s widespread knowledge about the best merchant cash advance companies for borrowers. But what about merchant cash advance investors? Consider the following three firms as the best MCA companies to invest in:

• National Funding: National Funding has been an MCA blue blood since 1999. They're a great option with factor rates between 1.17 to 1.36, advances as high as $250,000, and some of the market's fastest turnaround times.  
• Strategic Funding Source: Strategic Funding Source, Inc. is a New York-based financing provider offering merchant cash advances with customizable repayment terms and low rates to businesses such as retailers, restaurants, hotels, medical professionals, and manufacturers.
• Rapid Finance: Rapid Finance, a sister company of Rocket Mortgage, offers working capital to small and mid-sized businesses in the US with fast and convenient application processes, advances up to $500,000, and factor rates starting at 1.22.

Investment Potential of Merchant Cash Advances

MCAs are a higher risk than traditional small business loans and other investment vehicles like stocks or bonds. However, with those potential risks comes the potential for higher returns almost immediately.

How Does an Investor Make Money Through Merchant Cash Advances?

The role of the investor in merchant cash advances is as the lender or financier. The investor provides a small business with immediate financing in exchange for a percentage of the business's future credit card sales until full repayment of the MCA. These repayments would come daily, weekly, or monthly over however long the repayment period is.  

How Much Can I Make in Merchant Cash Investing?

If you’re interested in becoming a merchant cash advance investor, you could stare at 20% to 80% potential returns.

However, understand that the returns depend on several factors, including:

• Percentage of Future Sales: This rate varies depending on the MCA terms. The higher cut of credit card sales the investor gets, the higher the returns.
• Repayment Period: Different repayment periods can affect potential returns. The longer the repayment period, the more an investor can earn.
• Business Performance: Because MCA repayments depend on a cut of a business’s credit card sales, potential returns rely on that business’s performance.  
• Other Risks: Risks like default, fraud, and economic conditions can also affect potential returns. 

The Impact of Economic Conditions on Merchant Cash Advance Investing

Because returns from MCA investing hinge on the performance of the borrowing business, economic conditions can have a significant impact.

• Interest Rates: When interest rates rise, the cost of borrowing increases for businesses, thus making it more challenging for them to make the required repayments.  
• Inflation: Inflation causes the cost of goods and services to rise, making it more expensive to run a business. If a borrowing business can’t keep up with inflation, it may struggle to repay the MCA.
• Overall Economy: With a recession or economic downturn, businesses may struggle to generate enough credit card sales to repay an advance.  

Example of Returns on Merchant Cash Advance Investment

A local gym that generates $100,000 monthly in credit card sales needs money to buy new equipment but can't get approved for a business loan.

So instead, they receive a $50,000 MCA investment with a 6-month repayment period. In addition, the terms pay the investor 15% of monthly credit card sales at a 1.5-factor rate.

The percentage of future sales determines the investor's return on investment (ROI). In this case, the gym has to pay back $15,000 a month for 6 months (15% of $100,000 in monthly credit card sales).

So, the investor gets $90,000 over 6 months after investing $50,000. This figure will give them an 80% ROI.

Understanding the Risks of Merchant Cash Advance Investing

MCA investing offers high returns in a short amount of time, but it also comes with several risks.  

• Different Repayment Structure From Traditional Investments:  MCA investing's repayment structure depends on a business's credit card sales and financial performance, making it riskier and more uncertain than traditional investments.
• High-Interest Rates: MCA investing charges factor rates that result in much higher interest rates than traditional financing, leading to costly financing, increased financial stress, and a greater risk of default.
• Unregulated Industry: Because the MCA industry has no federal regulations, investors don’t have the benefit of oversight and protection they have for other types of investments.
• Lack of Transparency: The MCA industry's inconsistent disclosure of fees, terms, and risks can result in uninformed investments and substantial financial losses.
• Failure of the Borrower's Business: MCA investing is risky because it depends on the borrowing business's revenue, making it vulnerable to business failure. Small businesses with unstable cash flows typically use MCA investments, which increase the chance of default and potential loss of capital for investors.

Pros and Cons of Merchant Cash Advance Investing

Investing in merchant cash advances (MCAs) has both pros and cons. Here are some of the benefits and drawbacks to consider.

What Are the Benefits of Investing in Merchant Cash Advances? 

• High Returns: MCAs offer high returns in a short amount of time to compensate for risks.  
• Easy to Understand: MCAs have a simple and straightforward structure.  
• Diversification: MCAs do not correlate with the stock market or other traditional investments. Although MCAs are riskier investments, they can help diversify your portfolio and amplify returns if all goes well.  
• Fast Turnaround: The fast turnaround benefits both borrowers and investors. MCAs can disburse funds to borrowers in as little as 24 hours and provide investors with a quick return on their investment.

What Are the Drawbacks to Merchant Cash Advance Investing?

• High Risk: The MCA industry lacks regulation, lacks transparency and depends heavily on a business's performance. Additionally, financially distressed businesses that receive MCAs may struggle repaying the investment.
• Lack of Regulation: MCA investing is not federally regulated, which leaves investors largely unprotected and vulnerable to fraud and lack of oversight.
• High Fees and Interest Rates: The high fees and interest rates MCAs charge can drain a business’s cash flow and result in lower investor returns.
• Limited Liquidity: Borrowers may face penalties for early or late repayments. Similarly, investors in MCA may also face penalties for early withdrawals and require extended waiting periods to access their capital.
• Ethical Concerns: The MCA industry is under increased regulatory and legal scrutiny due to ethical concerns over exploiting financially strapped small businesses through high fees, interest rates, and unfavorable terms.

Real-Life Examples of Successful Merchant Cash Advance Investments

While there are many successful MCA investments and investors, much of this data is private and not publicly disclosed.  

However, several examples of successful merchant cash advance investments and investors exist.

A recent example is tech startup BuzzAr.  

BuzzAR began as a B2B augmented reality firm but received lukewarm interest from investors when it wanted to raise capital to expand into B2C operations.  

After receiving an MCA investment and a quick injection of capital, BuzzAR successfully developed 5 new B2C products and managed to grow its user base by 10X.  

Moreover, many other successful investors like David Gilbert, who founded National Funding in 1999, have made a career building an impressive net worth from MCA investing. Gilbert’s provided $4.5 billion in working capital and equipment leasing for over 80,000 small- to medium-sized businesses in the U.S. and is considered one of San Diego’s most influential business leaders. 

How Do You Become a Merchant Cash Advance Investor?

If you fit the criteria of an accredited investor, you can become an MCA investor by following these steps:

• Research MCA Providers: Look for MCA providers with a strong track record and positive customer reviews. Learn how they operate, their fee structure, and their funding history.
• Evaluate the Investment: Evaluate the investment opportunity, including the repayment structure, interest rates, potential returns, and, most importantly, risks.  
• Determine Investment Amount: Most MCA companies require a minimum investment amount. After your due diligence, determine how much money you want to invest.
• Sign Investment Agreement: Once you agree to the terms, sign an investment agreement.
• Provide Funding: Provide the agreed-upon funding to the MCA provider.  
• Receive Payments: You'll start receiving money until you recoup your investment.
• Monitor Performance: Regularly monitor the investment's performance and ensure that the MCA company is complying with the terms and meeting expected performance.

Wrapping Up: Top Tips for Successful Merchant Cash Advance Investing

Here are some tips to help for successful merchant cash advance investing:

• Conduct Thorough Due Diligence: Research the MCA provider and evaluate the investment opportunity carefully.
• Diversify Your Portfolio: Don't put all your eggs in one basket. Spread your investment risk across a variety of asset classes.
• Monitor Performance Regularly: Monitor the performance of your MCA investment regularly to ensure it is performing as expected.
• Understand the Repayment Structure: Make sure you fully understand the repayment structure and the risks involved in investing in MCAs.
• Seek Professional Advice: Consider consulting with a financial advisor or investment professional to help you make informed investment decisions.